Academic journal article Journal of Social Research & Policy

Expectations and Happiness: Evidence from Spain

Academic journal article Journal of Social Research & Policy

Expectations and Happiness: Evidence from Spain

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

The importance of expectations on happiness is a relatively new area of research (Frijters, Liu & Meng, 2008; Senik 2008), while the study of anticipation has a relatively longer history (Loewenstein 1987; Berns et al., 2006). Some authors, such as Schwartz (2003), have stressed the important role that holding low expectations may have in generating future happiness; according to this argument, people who hold high expectations are more likely of facing future disappointment. Although Schwartz's argument seems reasonable, it is important to state that it neglects the role that expectations play in present happiness.

A relative new approach postulates that expectations have consumption value in the present. For example, in order to study optimal savings decisions, Brunnermeier & Parker (2004) assume that expectations of future consumption have present consumption value. Frijters, Liu & Meng (2008) also assume that expectations are consumption goods, when examining the effect of income expectations on life satisfaction among the Chinese population; they present evidence showing that expectations play an important role in explaining current life satisfaction in urban areas. Senik (2008) also examines the causal effect of expectations on happiness using a panel data from Russia; she finds a strong effect of expectations on life satisfaction.

It is possible to think about three potential channels in the relationship between happiness and expectations: First, current expectations people have about the future may influence their current happiness. Second, current happiness may influence current expectations about the future. Third, the realization of current expectations - an event which will take place in the future - affects future happiness. The first two channels deal with a bidirectional relationship taking place in the present between expectations and happiness, while the third channel links present expectations to future happiness. The third channel has received greater attention by the 'keepingexpectations-low' literature, which emphasizes disappointment as a source of unhappiness. This paper focuses on the first two channels, with a particular interest on the impact of current expectations on current happiness, while recognizing the existence of endogeneity; this is: current happiness may also influence current expectations. An instrumental-variables technique is used to address the endogeneity problem in order to find out what the impact of expectations on happiness is. People's past economic situation and their optimist/pessimist personality are used as instrument variables, on the basis of the available information. This research project cannot study the third channel due to the cross-section nature of the database; panel data would be required to fully grasp all channels taking place in the relationship between happiness and expectations.

The paper relies on a micro-level database from Spain, which contains information about expectations, happiness, and many other relevant variables. Due to the cross-sectional nature of the database this paper uses an instrumental-variables approach to deal with potential endogeneity problems between current expectations and current happiness.

Literature Review: Happiness and Expectations

Expectations: The present and the future

Expectations comprise both the present and the future; expectations are made in the present and they make reference to what people foresee in the future. People may have expectations about many things; for example, their income, their marriage, and their job. It is important not to confuse expectations with their realization. Expectations take place in the present, while their realization takes place in the future.

The ability of thinking about the future is in human condition (Gilbert, 2007). Human beings are able of gathering and selecting information, recalling events, analyzing patterns, identifying trends, attributing possibilities to the occurrence of potential events, pondering the impact of their actions as well as of other persons' actions, and evaluating interactions among agents in order to envisage what the future will bring; most of these factors are studied by what nowadays is called Prospect Theory (Kahneman, 2011; Kahneman & Tversky, 1979). …

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